Improving cash-forecasting processes and accuracy is front and center on many treasurers’ lists of top priorities. That’s because without it, corporates end up holding excess cash, which had an opportunity cost, not to mention making the company a fat target for activists. Also, nowadays, the cost of inaccuracy has become more evident as banks refuse or limit deposits or charge negative interest rates on them.
Generally, companies do a pretty good job of forecasting cash in the short term. As per results of a recent Global Cash and Banking Group (GCBG) pre-meeting survey, more than 64 percent of members were able to predict very accurately their next-day cash. However, this accuracy decreased dramatically for those attempting to forecast cash for longer terms. Only half of respondents attempted to forecast cash one year out.
But the process is still more of an art than a science, members say. Cash-forecasting processes have not followed the automation trend other processes have, largely remaining in Excel spreadsheets. Although there are better tools to analyze/categorize actuals and extrapolate trends, these tools cannot yet capture the business and “tribal” knowledge needed to generate accurate forecasts.
One challenge is that some of the “tribal” knowledge, that knowledge pertinent to other parts of the company, is outside of treasury. Although treasury depends on other groups in the organization for data and knowledge, those groups may have competing priorities, so it is hard to get them invested in the process. Try to align objectives across organizations. One member mentioned that they use their in-house bank structure to align objectives: business units that need additional funding, or less funding than was forecasted, get penalized on the rates that are applied to their funding or investments.
Question of time
When trying to decide how far out to forecast and how to present the information, consider who is consuming your information and what it is being used for. As per GCBG pre-meeting research, cash forecasting is mainly used by the treasury organization and the CFO. This aligns with the main reason why companies forecast cash:
- Short term: to allow for day-to-day cash positioning and investing/borrowing;
- Medium term: to improve liquidity/funding planning;
- Long term: to respond to management focus.
Present the information keeping these objectives in mind, so the information becomes actionable and relevant. For example, location and accessibility of the cash is as important to understand as how much cash will be there at the end of the quarter.
The renewed focus on cash-forecasting accuracy and efficiency will continue to be a priority for treasury professionals. This is one area in which automation has not caught up yet. But longer term, as the cost of automation and of processing big loads of data continues to decrease and investments on fintech start to mature, cash forecasting can be where most advances can be made.